Dollar loses top spot as markets prepare for big meeting

David Hobart

The US dollar found itself knocked off its previous high point in the forex markets on Wednesday.

The currency had begun the week in a positive position, with many traders preferring it over safe haven currencies – despite question marks over a recent yield curve inversion and its ongoing trade-related fights with China.

However, Wednesday, saw some declines for the dollar – largely due to worries over the future direction of monetary policy.

It is believed that Federal Reserve Chair Jerome Powell, who will be in attendance at this meeting, may use a speech while he is there to indicate when and how the Fed will cut interest rates in the future.

Any indication as to what might happen next could be bolstered by items seen in the minutes of the July meeting, which are expected to be published today (Wednesday).

It is widely expected that there will be more rate cuts this year, potentially at the meeting of the Fed’s Open Market Committee scheduled for September. This expectation comes after the Federal Reserve slashed interest rates by 25 basis points, or 0.25%, at the bank’s last meeting in July.

It is likely that other major central bankers will make speeches at this event, or at least use it to give some kind of indication of their bank’s future plans.

The dollar index suffered as a result of these developments. It saw a loss of a fifth of a percentage point over the course of the night and reached 98.232 at one stage. The index is a tool designed to help traders see how the dollar is performing in comparison to six other major currencies from across the globe – although it is not itself a currency.

The dollar did manage to scramble into a better position in some of its currency pairs over the course of the day. These included the Japanese yen where this pair saw the dollar rise by 0.2%, reaching 106.460 yen at one stage. This was a reflection of the market’s increased appetite for risk, as the Japanese yen tends to be seen as a “safe haven” currency.

The index’s value loss came largely as a result of gains for the single European currency. The euro heavily weights the dollar, so its success can often spell loss for the dollar. It went up by a fifth of a percentage point in the EUR/USD pair, reaching $1.1094 at one stage.

The euro managed to cling to its position despite the fact that there was a major dose of political instability.

The Italian Prime Minister Giuseppe Conte quit his post yesterday as major parties continue to wrangle over who should lead the country.

However, the markets appeared to judge Conte’s decision in its wider context. Italy tends to be seen as an unstable democracy over the long term, and regularly changes its government and Prime Minister, so the euro barely suffered.

Perhaps a more worrying prospect for the currency will be the next monetary policy decision of the European Central Bank which, as is the case with the Federal Reserve, is expected in September.

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David Hobart
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